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GBP crosses gap down following ‘Yes’ lead in Scots poll

Gaps were printed on all GBP currency crosses this morning. The reason? A referendum for Scottish independence is coming (Thursday September 18, 2014). Scotland wants to break away from the United Kingdoms to be an independent state. Shocking the market into action is a poll over the weekend that shows ‘Yes’ leading.

So what caused the gap?

For the first time since this referendum was set it, the ‘Yes’ camp managed to get 51% through polls vs 49% for those against the split.

What does this mean for the market?

Effectively if Scotland pushes through with independence, it will set a precursor in the region. One of note is Catalonia’s push to break away from the Kingdom of Spain to establish independence (referendum on Sunday November 09, 2014).

With Scotland’s referendum, some questions that should pop into mind for traders and investors are:

What currency will Scotland use?

How much of UK’s GDP will ‘disappear’?

What will happen to UK’s credit rating?

Will Scotland assume UK’s debt?

Will Scotland remain in European Union?

As we can see, each question is high impact which explains the shocking market gap this morning.

Most important question: Can we predict the outcome for GBP based on technical analysis? Can make money?

Hourly charts of GBP crosses

Politics aside, we address the more important question. Can we make money from this?

Let’s look at the GBPUSD hourly chart to draw some clues from the gap.

GBPUSD H1 charts shows Fib retracement of 38.2%

Taking a Fibonacci reading from the high of Friday 05 Sept 2014 to this morning’s low, we can see that in lieu of the strong gap down of 140pips, the market has retraced to an overall of 38.2%. In reference to a previous article written by Tiong Hum on Market psychology at important fibonacci retracement levels, he wrote that:

In a well entrenched trend, price is not able to reach deep retracement levels…

This is evident in GBP crosses with retracements, following the gap in the morning, not exceeding 38.2%.

GBPAUD H1 chart shows Fib retracement at 38.2%

GBPJPY H1 chart shows Fib retracement of between 38.2% and 23.6%

GBPNZD H1 chart shows Fib retracement of 23.6%

GBPSGD H1 chart shows Fib retracement at 38.2%

GBP on the whole is currently experiencing a downward slide with any further news of Scotland’s possible independence likely to exacerbate this move.

A look on the Monthly charts of GBPUSD clearly reveals that although 2014 made a new 5 year high, this is in fact just a 50% retracement of the plunge in 2007-08.

GBPUSD Monthly charts shows recent up move is just a 50% retracement

What does it mean for traders?

I anticipate some questions from fellow traders which I’d like to address here:

Will the gaps close? See our posts here, here and here. Some gaps close, some don’t so it is better to focus on the merits of setup each currency pair is showing. Since the gaps today moved in the direction of trend and price action are already showing resistance at Fib levels, then those levels are resistance we should be watching.

Go long or short? If you looked at GBPUSD only, the pair is showing downtrend flow in hourly, 4-hourly and daily time frames so it is sufficient to say that if you are trading these time frames, going short with the trend is the right thing to do.

As a reminder however, those who have open positions already committed should look at target levels. Those who don’t have open positions already should be mindful of another gap (which we don’t know direction) over the weekend.

Last time, many things that I wanted were just dreams, now I see them as possibilities. I’m looking forward to own pent-house suite in Manhattan overlooking Central Park because forex trading with Tflow® makes it possible. Find me on Google+

Hi Guoyong, your guess is as good as mine. I don’t think anyone our generation has seen a development like this happen to a major financial centre. On the other hand, a look at FTSE tells me that there is a major ceiling overhead. Don’t think the the reward proposition favours long at the moment.

1. I checked the current green zone ( 6800-6850)again, it is the zone where footsie had 2 previous tops (1999, 2007) and then a major crash of ~3000 points subsequently.
So i was wondering if something major might happen again at 6800-6850 region, and taking a primitive logic , 1999 ( +8) -> 2007 (+8) ->2015, will something be happening between now to 2015?

2a) For stock markets to have just a catastrophic fall, am I right to say that a huge fundamental reason need to be behind this global move? Can I attribute the 1999 move to 1998 asian financial crisis and 2007 move to global sub-prime crisis?

b) If so, how long from your past experiences, do the fundamentals take to develop to become a full-blown global financial meltdown?

3. If 2015 was to be the year that price start to have a huge downmove again, will current outcome of referendum be of any considerable impact? or are there currently any larger global fundamentals forces that are already starting to shape up and perhaps can serve as a warning signal, as price continue to linger at this green zone which u have identified?

1. “1999 ( +8) -> 2007 (+8) ->2015, will something be happening between now to 2015?” Why not? Looking at stock market movement as cycles is a common method of timing the market. Whether something will happen or not between now to 2015 is something you got to decide for yourself.

2a, b. Asian Financial Crisis and US Subprime Crisis were both inflated by speculative or ‘hot’ money which was the result of cheap credit and then deflated spectacularly when that credit was taken away. Your best chance to time this market is to look at interest rates.

3. I recommend you Google for answers to these questions. As for warning signal, let price action talk to you.

Price action trading can be easy with Tflow®
Price action trading works very well when currency trader combines price information into a rule based approach. In this post, we look at price action ‘boxes’ drawn on MT4 to visualise trend. Example with EURCAD.